Obama’s Plan

Senator Barack Obama made public a four-part plan to address the current economic crisis – with a focus on his bread-and-butter – the middle class.

Obama has proposed the following:

• Temporary tax credit for firms that create new jobs in the U.S. over the next two years
• Penalty-free withdrawals from retirement accounts over until the end of next year
• Temporary lifting of taxes in unemployment insurance benefits
• 90-day foreclosure moratorium for homeowners “acting in good faith”

Let’s analyze each of Obama’s points individually.

Tax credits for new jobs

In practice, this sounds like a great idea.  However Obama needs to explain where the outlay for such a credit will come from before it can be proven to be beneficial.  What cuts will be made to the federal budget to allow for these credits?  Likely none, given the fact that cutting social programs isn’t what a Democrat is prone to do.  So the real question is what types of taxes will be increased to pay for these credits?  Will Obama propose to increase the capital gains rate even higher than he has already suggested?  Isn’t this a time when capital gains rates should be lowered, in order to provide more confidence in the stock market and to encourage taxpayers to put more money into the Dow, to prevent the daily sell-offs that have occured over the past two weeks?

So maybe he will increase the tax rate for those making over $250,000 a year to come up with the needed money.  But wouldn’t he be taxing the very same S-Corporations who he is also trying to reward with these job credits?  Seems counterproductive to me.

Retirement accounts

This is a very astute idea – giving those who have suffered from steep inclines in mortgage payments or those who have suffered dreadful losses because of a falling Dow a chance to dip into their retirement savings without punishment.

Specifically Obama has placed a cap of 15% with a maximum of $10,000 on the ability to dip into one’s retirement savings.  This maximum threshold sounds like a great idea – seeing as how letting people divest all retirement savings penalty free would leave many financial instituions in a world of pain with the sudden loss of previously guaranteed liquidity.  The loss of liquidity within these very instituitions is what got us into this “credit crunch” in the first place.  Hopefully a loss of what were once thought to be guaranteed funds wont’ put these institutions into a bigger pinch than they currently find themselves in.

Unemployment Insurance

Again, one has to ask where the money in the federal budget will come from to make up for the loss in revenue from nontaxation of unemployment insurance benefits.  Or of course, what taxes will be increased to pay for this proposal.

Foreclosure moratorium

Despite the fact that those who agreed to mortgages on homes who can no longer afford to pay actually deserve to be kicked to the street, it is an unfortuante side effect that foreclosures within a neighborhood devalue the property of upstanding citizens who live within their means.  These fine folks should not be punished for the idiotic actions of others.  However, how Obama plans to interpret the prhase “acting in good faith” will be the real key to this portion of the proposal.

As one can see, there are many holes that need to be addressed in Obama’s plan before a final verdict can be made on its potential for success.  One has to wonder what took Obama so long to address the economic crisis, as this problem has plagued the nation for well over six weeks.  He’s been awfully quiet about the economy until now – just a few weeks before election day.

Kashkari speaks

The “Bailout Boss,” Neel Kashkari, spoke today to provide details on how the taxpayers’ infamous $700 billion will be used.  Namely, Kashkari provided five key arenas in which the Treasury Department will expend this money:

• Purchase of failed mortgage-backed securities
• Purchase of mortgages
• Purchase of equity in banks
• Assistance to delinquent borrowers to prevent foreclosures
• Insurance of mortgage-backed securities and mortgages

These ideas may sound good on paper, or in a speech, as the case may be.  But let’s examine a bit further, especially on the purchase of mortgages and assistance to delinquent borrowers.

During the second presidential debate, Senator John McCain made reference to buying up mortgages and manipulating their terms in order to prevent foreclosures.  It appears Kashkari and the Treasury are on board with this plan.

However, a couple of large caveats need to be made for such provisions.

Firstly, the principal on any mortgage should not be adjusted downwards to reflect the true current property value of a home.  If the federal government is going to bail out borrowers who can no longer afford their mortgages for purchasing homes that have dropped in value, then I (as someone who can pay my mortgage) expect the same treatment.  My property values have lowered in the last 5 years due to the enormous amount of homes that have been on the market in my neighborhood, all of which have struggled to move.  Just because I can pay my mortgage each month doesn’t mean I don’t deserve equal treatment as those stupid enough to buy homes that they couldn’t afford through the use of adjustable-rate mortgages.

What’s good for the goose is good for the gander.  And as a proud gander, I expect my principal to be adjusted just as much as any low-income earner.

Now that’s just not feasible, right?

So instead of adjusting the principal, and punishing the responsible folks of our great nation, what needs to be done is an adjustment on the interest rates.  Bring the interest rates down on the houses purchased by those who bought over their heads.  Most importantly, though, let the losses be realized by the lending institutions who were “mavericky” enough to approve loans to risky borrowers, all in the name of a quick buck.

Let those who caused the housing bubble to inflate and then subsequently pop be the ones to take responsibility.  The banks, the underwriters, the faulty credit score reporters, those that practiced in mortgage fraud – these should be the parties who have to take the losses as a result of decreased interest rates on homes on the brink of foreclosure.  Not responsible Americans, not the federal government, and not taxpayers as a whole.